SCMP.COM

No free ride

Kowloon Motor Bus Company, a subsidiary of Sun Hung Kai Properties, issued a profit warning this week, saying it might have to raise fares again due to soaring fuel prices and increased operating costs.

The company forecast losses for the first half of this year, and thus urged the government to set up a 'fare stabilisation fund' to subsidise public transport fares. It said the fund, to be financed with seed money from the government, would provide a buffer against surging fuel prices. KMB warned that it might apply for another fare rise if it failed to achieve a reasonable rate of return.

The government approved an overall average fare increase of 3.6 per cent for KMB in May. The company has posted reasonable revenue gains over the past years. It sounds rather unreasonable for the company to threaten to raise fares again based on forecast losses. It also goes against the fundamental principles of a free-market economy. The company is financially strong and can certainly withstand slight changes in operating costs and revenue.

In a free-market system, there are no risk-free solutions and companies would have to assume that financial risks are part and parcel of doing business. If a company reaps profits, that means it is well run and successful. But if it doesn't, it will fall by the wayside and be phased out eventually.

KMB has made huge profits over the years. It has never reduced fares when it recorded revenue growth in the past and now, with only a projected loss in revenue, it's already crying for help, demanding to be compensated and subsidised by taxpayers' money.

The existing public-transport franchise model already includes an established mechanism to guarantee a certain level of revenue for operators to make sure they will have a reasonable rate of return on their investment. Those who know how to play this game well boost investments in other areas to increase profit margins. So if KMB is losing money, the only explanation is that it is not operating efficiently. The company can only blame itself and has no right to ask the government to bail it out.

Instead of increasing fares, there are other ways to counter soaring fuel prices and the hostile operating environment; the bus company could consider buying oil futures to offset price rises and it might even reap huge profits if it invested at the right time.

When a company fails to achieve its goals, it often means that those at the highest level of organisational management have failed to perform. So if we want to improve the situation, the best solution is to replace the senior management.

Sun Hung Kai Properties, as the major shareholder of KMB, has forgotten that by pressing the government to subsidise its bus operation, it has inadvertently strengthened the common belief that property developers are running Hong Kong, and hence fostered the kind of anti-business sentiment that business itself fears.

In today's world, perception is reality. Once the perception is formed, it becomes nearly impossible to question or change it. By pressing the government to finance its bus operation with public money, it will only reinforce that negative perception.